‘Can I have a pay rise?’
‘No,’ replied the boss.
‘Well could you cut everyone else’s salary then?’
In a world populated by the rational agents of economic theory, no-one would find any humour in this exchange – it could not exist in the first place. That most of us find it mildly amusing is because we recognise how someone could draw some satisfaction from seeing an improvement in their relative position even though their absolute position remained unchanged.
Behavioural scientists have known for some time that the carrier of utility – satisfaction in this case – is not an absolute figure, like total wealth. Instead, it is our position relative to some reference point that makes us happy. If we are above the reference point (e.g., the salary of others, our last salary, our salary goal), we are happy. If we are below that reference point we are not. However, a recent study suggests that this might not be strictly true.
Researchers at the NBER offered a sample of employees at the University of California the opportunity to review the salaries of any state employee, including those at the university, on a dedicated website. More than half seized the opportunity, the vast majority of which used the site to review the salaries of colleagues in their own department. Some days later, the researchers surveyed the sample on their job satisfaction and job search intentions. Not surprisingly, employees who discovered their salaries were below the median of the department reported lower levels of job satisfaction and were more likely to report a desire to look for another job. This group were also more likely to believe that wages were set unfairly at the university. However, there was no corresponding increase in satisfaction or fidelity among those whose earnings were above the median.
The stark asymmetry in the satisfaction effect means that sharing salary information simply results in a net decline in workforce satisfaction. This alone, the authors argue, is a good reason not to do it. For the badgered boss in the opening joke, she can also make everyone happy by agreeing to the second request. Of course, she doesn’t actually change anyone’s salary, but the cast-iron non-disclosure policy will ensure that nobody is any the wiser.
 Card, David. et al. (2010) Inequality at Work: The Effect of Peer Salaries on Job Satisfaction, NBER Working Paper 16396